By Paulina Duran
SYDNEY (Reuters) - The Australian prudential regulator on Friday scrapped a minimum 7% interest testing rate for bank customers' loan applications, adding to the stimulatory tools being deployed to revive the sluggish economy.
The change comes in a week where the central bank cut interest rates to an all-time low of 1% and the government passed A$158 billion ($111 billion) worth of tax cuts to boost an economy that is threatening to stall.
The Australian Prudential (LON:PRU) Regulation Authority (APRA) said it would give banks greater flexibility to set their own minimum testing rates, in a dramatic shift in just a few months after a public inquiry said banks needed to tighten lending standards.
"In the prevailing environment, a serviceability floor of more than 7% is higher than necessary," said Chairman Wayne Byres.
The change removes the minimum 7% interest rate banks are currently required to use in their stress tests of customers' loan applications and instead introduces a 2.5% buffer above banks' loan rates to assess serviceability.
The easing of the borrowing limit, first introduced in 2014, comes amid a sustained drop in house prices, record-low credit growth and as the central bank considers further cuts to interest rates.
The changes also mark a softening of APRA's more strident position on mortgage regulations that followed a scathing year-long public inquiry into banking sector misconduct.
That inquiry put forward dozens of recommendations including a strict interpretation of current lending rules and tests before signing on home borrowers.
"With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that (banks) actively consider their portfolio mix and risk appetite in setting their own serviceability floors," Byres added.
The changes were effective immediately, following a consultation of its proposals announced in May.
($1 = 1.4233 Australian dollars)